A £600m increase in business rates liability? It’s not too late to change course

The government says it wants faster growth, more start-ups, stronger regions and higher productivity. We hear about these goals endlessly, and for good reason. But growth depends on whether the underlying conditions for business expansion are allowed to exist. And one of those conditions is being steadily dismantled.

A technical change to the way flexible workspace is valued for business rates will, if it continues, impose an effective £600m tax increase on the sector (these figures are taken from analysis undertaken by former Treasury economists). While the change may sound administrative, its consequences directly undermine the infrastructure that modern small businesses rely on to survive.

Flexible workspace isn’t niche anymore; it’s a core economic linchpin. It allows new businesses to get off the ground quickly whilst managing costs, growing companies to hire more people without locking themselves into long leases, and communities of businesses to develop side-by-side.

That ability to grow and contract within the same space is what makes early-stage growth possible for many businesses. That’s why flexible workspace has become the natural home for small businesses in our fastest growing cities and most innovative sectors. It’s also why, for almost a decade, flexible workspace has been the fastest growing part of the office market. Growth has happened because the model fits the reality of how businesses work today.

For decades, the business rates system reflected that reality. Serviced offices were valued at the level of the individual unit. This recognised that these spaces house multiple independent businesses, each operating separately, each growing or shrinking at different speeds, and all sharing a common need for adaptable space. Amongst other things, this ensured small business rates relief could be rightly applied.

Following court cases about ATMs and barristers’ chambers, this approach has been swept away, and a move to assess entire serviced offices as a single unit is setting in. Whilst a whole-scale reassessment of every serviced office is not taking place, this approach has already been made for many, and it’s made clear it’s the new way forward.

The result of this change is a £600m increase in business rates liability across the sector. Huge backdated bills have been issued in a handful of cases already and new investment is being paused or cancelled.

For some operators, particularly those running on thin margins, centres will become unviable overnight and closures will be immediate. Where centres do remain open, costs won’t vanish. They’ll just be passed on. For the small businesses using these spaces, that will often mean price increases of around £5,000 per unit.  For the thousands of small businesses utilising serviced offices this could make a real difference, and potentially drive people back to working at their kitchen table.

The effects don’t stop there. Flexible workspaces support far more than just their occupants. They sustain footfall in town centres, anchor local supply chains and allow skilled workers to operate beyond a small number of major cities. Some £260m of high street spending could disappear.

Both the Federation of Small Businesses and the Confederation of British Industry agree that this change is misguided and damaging. The Flexible Space Association has raised the issue repeatedly in meetings with ministers and with MPs from all major parties, because the implications go far beyond one sector.

If policymakers genuinely want more start-ups, more scale-ups and more regional growth, then they have to protect the infrastructure that makes that possible. Flexible workspace is an integral part of that infrastructure.

The previous approach to valuation existed for decades because it worked. Returning to it would prevent further damage and restore confidence. There is still time to course correct, and we will continue to take every possible opportunity to press the government to do so before it’s too late.